The 14-12 defeat in Rio de Janeiro earlier this morning (NZ time) was one of biggest upsets in sevens history and its impact on the All Blacks Sevens' campaign was compounded when Williams was forced off the pitch two minutes into the second half. They fought back to beat Kenya 28-5 later in the day/
Williams, twice a World Cup winner in the 15-man game, sustained the injury charging into a tackle but immediately indicated to the bench that he needed help.
The New Zealand Olympic Committee (NZOC) later confirmed he would miss the rest of the tournament.
"He suffered a partial Achilles rupture of the left Achilles tendon," a statement said.
He has been replaced by reserve Sione Molia.
New Zealand could need yet another replacement after Joe Webber was taken off the pitch on a stretcher with a left shoulder injury soon after Williams. Another World Cup winner in the longer format, Liam Messam, is on standby.
The Japanese, forward Lote Tuqiri said, got a "boost" in confidence from the departure of Williams as a large part of their gameplan had been about stopping the former rugby league international's trademark offload.
Japan are ranked 10th out of the 12 teams taking part in Rio but thoroughly deserved their first ever win over New Zealand, who are seeded third.
In echoes of the victory of their team over South Africa at the Rugby World Cup last year, the Japanese showed no deference to the superpower of the international game.
"It's unbelievable," said Japan back Lomano Lemeki. "You've got to think that a minnow team can come here and beat a team that's supposed to be a gold medal contender. It's still pretty unbelievable and I am just shocked to be honest."
Teruya Goto and Kameli Soejima scored the tries for Japan and, crucially, Lemeki and Katsuyuki Sakai slotted the conversions.
That gave them the two-point lead they managed to hold on to for a famous victory, despite some desperate New Zealand attacks in the final couple of minutes.
Their veteran coach Gordon Tietjins walked off the pitch stoney-faced and he and the New Zealand players went straight past media into a meeting.
New Zealand's day looked to be getting even worse when Collins Injera scored a try to give Kenya the early lead in their second Pool C match.
The All Blacks Sevens rallied for a 28-5 victory, however, which kept alive their hopes of qualifying for the quarterfinals after their final pool match against Britain on Wednesday.
"Down but never out, always praise to the most high for blessing me with so much! Let's go @nz7s we still in this," Williams later tweeted.
On Tuesday, New Zealand lost to Australia in the final of the women's competition.